How do you determine which duration contracts to sell?

Jim2B

The idea is to maximize yield but it is a tug of war between yield and the amount of cash you get out of it. I'm looking for the strike price and expiration date that gives the best of both worlds. Some people might say that what counts is the total number of dollars made but you can't exclude the value of time, $100 in 3 months is a lot more than $120 in one year.

I do the calculations assuming I'm buying 100 shares and selling 1 contract. Using BWLD at the close today (40.50) I get the following numbers:

Option         BQULI Dec 08   BQULJ Dec 08   BQUCI Mar 09   BQUCH Mar 09
Strike           45.00          50.00          45.00          50.00
Cost              3.65           2.10           6.00           4.20
Cash            365.00         210.00         600.00         420.00
% of stock price  9.0%           5.2%          14.8%          10.4%
Gain             22.1%          30.2%          30.4%          37.7%
Yield           137.5%         213.6%          73.9%          94.8%

You get the most cash from Mar 45 ($600) and the highest yield from Dec 50. I try to get at least 10% of the stock price so that eliminates Dec 50. Since a yield of 74% is pretty darn good, I would sell Mar 45.

Since I'm usually on margin, I like the higher dollar amount since it cuts my interest charge.

You don't have to let the option expire. If it drops 50% in price I'm likely to buy it back.

Denny Schlesinger